As a developing country, Indonesia has many infrastructure construction projects which many foreign construction companies are interested to get involved in. There are two ways for a foreign construction company to provide construction services in Indonesia: by establishing (i) a foreign construction services representative office ("Rep Office"); or (ii) a joint venture company in the field of construction services ("PMA Construction Company").
For both options, the foreign construction company will require the participation of a local Indonesian construction company. This will either be as the local shareholder of the joint venture construction company or the local partner in a "joint operation" that must be formed following the establishment of a Rep Office.
I. Rep Office
The procedure for obtaining a license for a Rep Office for a foreign construction company is provided under Minister of Public Works Regulation No. 05/PRT/M/2011 regarding Guidelines for Granting Foreign Construction Representative Office Licenses ("Regulation 05"). According to Regulation 05, a Rep Office license for foreign a construction company will be issued by the Minister of Public of Works or the authorized official appointed by the Minister ("RO License") (Article 4(1)).
In order to qualify for an RO License, the foreign construction company must be certified as to its classification and qualification by the independent Construction Services Development Body (Lembaga Pengembangan Jasa Konstruksi – "LPJK") in Indonesia. Note that it must qualify as a grade "large" company (Article 4(2)). LPJK Regulation No. 11a of 2008 explains that a construction company may qualify as "large" if, among other possible criterion, its net assets exceed Rp. 3,000,000,000 (approximately USD 300,000).
The administration fee during the validity of the Construction Planning/Construction Supervision license is equivalent to US$ 5,000 (five thousand United States of America Dollars) and for Construction Operations, it is equivalent to US$ 10,000 (ten thousand United States of America Dollars) (Article 7). The RO License is valid for 3 years and can thereafter be renewed (Article 13).
After obtaining a RO License, the foreign construction services company may act as a contracting party for on-shore "construction services" work, but it must form a joint operation with a local construction services company (a local Indonesian or PMA construction company) (Article 10). Furthermore, the foreign construction services company is only permitted to handle construction projects which are complex, high risk and/or require advanced technology (Article 11(1)).
Please note that a joint operation does not involve the establishment of a new company, but consists of a temporary contractual arrangement between the foreign and local construction companies. Indeed, under Article 1(6) of Regulation 05, a joint operation is defined as a cooperation between one or more Foreign Construction Services Companies and one or more Local Construction Services Company which is temporary, to handle one or more projects and it is not a new legal entity under Indonesian laws and regulations. Under Article 10(2), the local party to a joint operation must be a limited liability company with 100% domestic ownership, and must have:
- a qualification equal to those of the foreign party (ie. "large");
- a Construction Services Business License; and
- a business entity certificate.
The basis of the joint operation for construction work is that the two parties will share the benefits and liabilities of the construction work in a specified percentage. As there is no formal (i.e. incorporated) joint venture by which each party's "ownership" percentage can be measured, each party's "stake" in the joint operation will depend on the amount of work to be performed by that party in the relevant construction project by mutual consent.
In light of the above, if a foreign construction company wishes to get involved in construction work in Indonesia for only short term projects, ie on a project basis, the foreign construction company may choose the option of establishing a Rep Office and obtaining a RO License as this does not require the establishment of a new company, only a temporary contractual arrangement with a local construction services company to provide construction services in Indonesia for as long as the RO License remains valid.
II. PMA Construction Company
Under the current Negative Investment List, ie Presidential Regulation No. 36 of 2010, the fields of construction and consultancy are open for foreign investment, but only as a joint venture with an Indonesian company that has certain qualifications. Foreign share ownership in a construction services company is limited to 67% and the remaining 33% must be held by a local shareholder. Meanwhile, foreign share ownership in a construction consultancy services company is limited to 55%, and the remaining 45% must be held by a local shareholder.
The above maximum foreign share ownership will apply to any PMA (foreign investment) Construction Company a foreign construction services company may wish to establish.
It is should be noted that according to the current Negative Investment List, the maximum foreign share ownership in an Engineering Procurement and Construction services company in the field of Energy and Mineral Resources is limited to 95%. However, after checking the reference numbers for Engineering Procurement and Construction services provided in the Negative Investment List in the Indonesian Standard Field Classification (Klasifikasi Baku Lapangan Indonesia – KBLI), the description of these services provided in the KBLI does not reflect the general understanding of Engineering Procurement and Construction services as related more to construction works. During our recent research at the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal), they confirmed that categorizing Engineering Procurement and Construction services in the Energy and Mineral Resources section is a mistake. An Engineering Procurement and Construction services company in the field of Energy and Mineral Resources section is related more to the procurement of equipment for oil and gas projects, not construction works. If the activities are related more to construction works, the Engineering Procurement and Construction services company will fall in the field of Publi Works and therefore the maximum foreign ownership will be limited to 67%.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.